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Halliburton is fined $7.5 million by SEC
by Floyd Norris
IHT International Herald Tribune

August 4, 2004

Halliburton secretly changed its accounting practices when Dick Cheney, now the U.S. vice president, was its chief executive officer, the U.S. Securities and Exchange Commission said on Tuesday as it fined the company $7.5 million and brought actions against two former officials.

The commission said the change enabled the company to report annual earnings in 1998 that were 46 percent higher than they would have been had the change not been made, and that it also allowed the company to report a substantially higher profit in 1999.

The commission did not allege that Cheney acted improperly, and the papers released by the commission did not detail the extent to which he was aware of the change or of the requirement to disclose it to investors. The SEC said that the vice president had testified under oath to the commission staff and had "cooperated willingly and fully in the investigation conducted by the commission's career staff."

The accounting change dealt with the way Halliburton booked cost overruns on projects. At the time, it was seeing large cost overruns on projects in the Middle East operated by its Brown & Root Energy Services business, which under its old accounting policy would have reduced its reported profit.

The actual change in accounting, the commission said, was acceptable under generally accepted accounting principles, but the failure to inform investors that the change had been made — and of its effect on the company's reported profit — was a violation of securities laws.

Halliburton's former controller Robert Muchmore Jr. agreed to settle the SEC action by accepting an order to cease and desist from further violations of the securities laws and to pay $50,000. Neither he nor the company admitted or denied the commission's allegations.

Gary Morris, who was the chief financial officer of the company at the time the actions occurred, did not settle. The commission filed a civil lawsuit against him in federal district court in Houston.

David Lesar, who succeeded Cheney as the company's chief executive in 2000, said, "We are pleased to bring closure to this matter."

Both Halliburton and the commission said the $7.5 million fine, which was relatively large for a case in which the commission did not even require the company to restate its earnings, in part reflected the company's conduct during the investigation.

The company said the commission believed that "there were lapses in the company's cooperation with the SEC staff, which had the effect of delaying the production of information and documentation necessary to an expeditious completion of its investigation."

Until the second quarter of 1998, Halliburton had dealt with cost overruns on projects by taking a loss for the amount of the overrun unless and until the company that it was working for agreed to pay part or all of the overrun. But confronted with a large overrun on a fixed-fee project to build a gas production plant in the Middle East — the commission did not say in which country — Halliburton changed its policy so that it would record the income it thought the customer would eventually agree to pay.

That change in policy was not disclosed until March 2000, when the company filed its 1999 annual report with the SEC. The commission said that pretax profit for all of 1998 was reported at $278.8 million, 46 percent more than the $190.9 million that would have been reported under the old accounting.

The first three quarters of 1999 also had earnings that were about $40 million higher than they would have been, although the percentage increases were smaller.

At the time the accounting was changed, Halliburton was in the midst of preparations to merge with Dresser Industries and was dealing with a decline in the company's share price brought on in part by slumping oil prices. It reported a 34 percent gain in profit for the quarter, far better than other oil services companies were reporting, and Cheney said then that "Halliburton continues to make good financial progress despite uncertainties over future oil demand."

The commission said on Tuesday that the gain would have been just 6.7 percent but for the undisclosed change in accounting policies.

In a call with analysts at the time, the company said Brown & Root Energy Services' profit rose 40 percent during the quarter, while in fact, the agency said, the operations would have reported a loss without the change in policy.

Nonetheless, the company took a cautious tone in that conference call, leading analysts to cut profit estimates and causing the stock to fall $3 the next day.

International Herald Tribune

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